3 Reasons to Put More Money In Your IRA Right Now

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Did you make a New Year’s resolution to be smarter with your money this year? Are you looking for a way to shave a little more off your tax bill? If you answered yes to either of these questions, then I have a solution for you: Stash more cash in your IRA.

This only applies to those who haven’t already maxed out their IRA contributions for the year. You’re allowed to set aside up to $6,000 per year to an IRA, or $7,000 if you’re 50 or older. Don’t put away any more than this, because then you’ll pay excess contribution penalties. If you haven’t hit these limits yet, here are a few reasons you might want to.

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1. You can deduct your traditional IRA contributions on your 2019 taxes

You can still make IRA contributions for 2019 as long as you do so before April 15, 2020. Any money you contribute to a traditional IRA will reduce your taxable income and consequently your tax bill for the year. This isn’t the case for Roth IRA contributions, though. You pay taxes on these contributions now so that you don’t have to pay taxes on your Roth IRA distributions in retirement. Stick to a traditional IRA if you’re going for the tax break.

It’s important to make sure that your contribution is applied to the right year. Some IRAs automatically count contributions made between the first of the year and the tax deadline as contributions for 2020. You may need to contact your plan administrator and specify that you want your payment applied to the 2019 tax year, so that you can take your tax deduction now instead of waiting a year.

2. You might qualify for the Saver’s Tax Credit

The Saver’s Tax Credit is a tax credit targeted at low-income Americans who want to save for their retirement. Tax credits are better than tax deductions because instead of reducing your taxable income, they reduce your tax bill dollar for dollar. In order to qualify for the Saver’s Tax Credit, you must be 18 or older, not claimed as a dependent on anyone else’s tax return, and not a full-time student.

Your credit could be 10%, 20%, or 50% of your IRA contribution, depending on your adjusted gross income (AGI) and your tax filing status. Your AGI is your income minus certain tax deductions. Here’s a table to help you figure out how much of a Saver’s Tax Credit you might be entitled to if you claim this credit for the 2019 tax year based on your AGI and tax filing status.

Married Filing Jointly

Head of Household

Single, Married Filing Separately, and Qualifying Widow(er)

50% Credit

AGI of $38,500 or less

AGI of $28,875 or less

AGI of $19,250 or less

20% Credit

AGI between $38,501 and $41,500

AGI between $28,876 and $31,125

AGI between $19,251 and $20,750

10% Credit

AGI between $41,501 and $64,000

AGI between $31,126 and $48,000

AGI between $20,751 and $32,000

0% Credit

AGI greater than $64,000

AGI greater than $48,000

AGI greater than $32,000

Data source: IRS.

So if you are a single filer, you have an AGI of $19,000, and you contribute $5,000 to your IRA for 2019, you would get a tax credit for 50% of your contribution, or $2,500. That means your tax bill would be $2,500 less than it would have been if you hadn’t made the IRA contribution. You could also claim the retirement savings tax deduction if you put the $5,000 into a traditional IRA.

3. It’ll help you be better prepared for the future

The last reason is perhaps the most obvious, or it should be. Setting aside money in your IRA now will increase your financial preparedness for the future. This is especially true if you are young. Your earlier contributions make more of a difference to your final IRA balance because they have more time to grow before you must begin drawing upon them.

Consider a $5,000 contribution that earns a 7% annual rate of return and remains in your IRA for five years. It would be worth a little over $7,000 by that time. That’s not bad, but if you kept all other factors the same and left the money in your account for 10 years, it would now be worth over $9,800, and if you let it sit in your account for 20 years, that single $5,000 contribution would be worth over $19,300.

Putting money into your IRA means you can’t spend it now, but the tax breaks it could give you today and the effect it can have on your retirement savings well outweigh this drawback. If you have a little extra cash to spare, consider putting it in your IRA before the April 15, 2020 tax deadline.

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